When you’re running a small business, every tax advantage matters. One of the more strategic methods for reducing your taxable income is tax loss harvesting. While it’s typically associated with individual investors, small business owners—especially those with investment accounts or who actively manage portfolios—can also benefit from this tax strategy.
In this post, we’ll explore what tax loss harvesting is, how it works, who it applies to, and how your small business might use it to reduce tax liability and improve overall financial planning.
What Is Tax Loss Harvesting?
Tax loss harvesting is the practice of selling investments at a loss to offset capital gains taxes. The IRS allows you to use capital losses to:
Offset capital gains (short- or long-term)
Offset up to $3,000 of ordinary income per year
Carry forward unused losses to future tax years
For businesses with investments—such as brokerage accounts, retirement holdings outside of tax-sheltered plans, or portfolios tied to corporate entities—this can be a useful way to reduce taxable profits.
How Tax Loss Harvesting Works
Let’s say your small business invested in two stocks:
Stock A: Sold at a $10,000 gain
Stock B: Sold at a $6,000 loss
You can apply the $6,000 loss against the $10,000 gain, reducing your taxable capital gain to $4,000. If you had no gains that year, you could deduct $3,000 of the loss from your business income and carry the remaining $3,000 forward.
This is tax loss harvesting in action—using realized losses to minimize your overall tax burden.
What Types of Businesses Can Use It?
Not all businesses benefit equally from tax loss harvesting. It’s most applicable for:
LLCs and S-Corps that pass investment income through to owners
Sole proprietors who hold investments in their personal name
C-Corps with taxable investment portfolios (less common for small businesses)
If your business actively trades, holds brokerage accounts, or invests in mutual funds, ETFs, or stocks, you may be eligible to harvest losses for tax purposes.
Types of Assets You Can Harvest Losses From
Tax loss harvesting applies to capital assets, including:
Individual stocks
ETFs (exchange-traded funds)
Mutual funds
Bonds
Cryptocurrency (with caveats)
Note: Real estate, business equipment, and inventory do not qualify for tax loss harvesting in this context.
Key Rules to Follow (and Mistakes to Avoid)
1. Watch Out for the Wash Sale Rule
One of the most common pitfalls in tax loss harvesting is violating the wash sale rule. This IRS rule states:
If you sell an investment at a loss and buy it back (or something substantially similar) within 30 days before or after the sale, the loss will be disallowed for tax purposes.
To avoid this:
Wait at least 31 days to repurchase the same asset.
Consider buying a similar but not “substantially identical” investment to stay invested. For example, if you sell a tech ETF, you might buy a broader index fund temporarily.
2. Know the Difference Between Short-Term and Long-Term Gains
Short-term capital gains (from assets held under 1 year) are taxed at ordinary income tax rates.
Long-term gains (held over 1 year) are taxed at preferential capital gains rates.
When harvesting losses, it’s smart to match the type of loss to the type of gain.
3. Only Realized Losses Count
You can only harvest losses once you sell the asset. Unrealized losses on paper (assets that dropped in value but haven’t been sold) don’t count.
Benefits of Tax Loss Harvesting for Small Businesses
✅ Reduces Taxable Income
Lower your capital gains tax bill or even offset a portion of ordinary income.
✅ Optimizes Investment Strategy
Trimming losing investments may improve your portfolio’s long-term performance.
✅ Supports Year-End Tax Planning
Harvesting losses before the end of the year can be a smart move to reduce your annual tax bill.
✅ Loss Carryforwards for Future Years
Even if you can’t use all your losses in one year, you can apply them in future years—giving you long-term tax advantages.
Is Tax Loss Harvesting Worth It for Your Business?
This depends on:
Whether your business has capital gains to offset
If your business structure allows pass-through taxation
If you manage investments actively enough to take advantage of loss harvesting
Whether your losses are large enough to make a material difference
For example, a sole proprietor or LLC owner with a taxable brokerage account could harvest $10,000 in losses in a down year, offset some freelance income, and reduce their tax burden by thousands.
But if you operate a retail shop without any outside investments, tax loss harvesting may not be relevant to your situation.
When to Harvest Losses
Tax loss harvesting is usually most effective:
Toward year-end (November–December)
During market dips or corrections
When you are rebalancing your portfolio anyway
After consulting your CPA or tax advisor
Many financial advisors recommend periodic portfolio reviews to identify loss harvesting opportunities throughout the year—not just in December.
Should You Do It Yourself or Work With a Professional?
While some savvy business owners manage their portfolios themselves, most benefit from working with a:
Tax advisor or CPA to ensure compliance and optimization
Financial planner or investment advisor to avoid damaging your portfolio strategy while harvesting losses
There are also automated services (like robo-advisors) that offer automated tax loss harvesting, but they may not be ideal for complex business needs.
Final Thoughts
Tax loss harvesting isn’t just for Wall Street investors—it’s a powerful tool that small business owners with investments can use to reduce taxes, improve cash flow, and grow smarter.
If your business has experienced market losses or you’re planning to rebalance your portfolio before year-end, now is a great time to explore whether tax loss harvesting makes sense for you.
📊 Want help building a smarter tax strategy for your business?
At Tax Alternatives, we help small business owners reduce taxes through smart planning, investment strategies, and IRS-compliant guidance.
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